Safeway, Costco and CompUSA are among dozens of Hawai'i businesses disputing millions of dollars of tax assessments levied by the state and counties, according to documents on file in a little-known office at state Circuit Court.

The office is Tax Court, where taxpayers seek redress from assessments they consider unfair, illegal or even unconstitutional.

Some of the largest appeals now before the court involve the state's collection of a "use tax" on large retail and wholesale operations doing business in Hawai'i.

Carol Pregill, president of the Retail Merchants Association of Hawaii, said it's important for the state to be fair and uniform in its tax collection policies affecting businesses, particularly when those policies affect "extremely competitive" retail businesses such as grocery stores.

"A one-half percent advantage or disadvantage in pricing can make a big difference for companies and for their customers," she said.

Lowell Kalapa, head of the Hawai'i Tax Foundation, said he was unfamiliar with the cases now pending before state Tax Court. But he noted that use tax collections are a small but significant part of the state budget.

The 4 percent use tax applied to interstate retail goods generated $35.3 million in the past tax year, up $3 million over the previous year.

And the half-percent use tax on wholesale interstate transactions brought in $32.9 million, an increase of $3.5 million, Kalapa said.

The use tax is imposed by the state on goods purchased from out-of-state sellers for resale here and is meant to "level the playing field" for local businesses that must pay in-state general excise taxes.

In tax return records filed as part of the appeal, Safeway revealed that its gross revenues from retailing operations in Hawai'i increased from $442 million in 2002 to $488 million in 2004, while its general excise and use tax payments grew from $16.97 million to $18.73 million.

In an appeal filed in May, Safeway Inc. is seeking state tax refunds of $1,745,813 in use taxes the company paid from 2002 through 2004.

UNCONSTITUTIONAL?

The state's imposition of the half-percent use tax on some of the goods imported by Safeway for resale here was improper, argued Safeway's lawyer, Ray Kamikawa, in the appeal.

Kamikawa was a director of the state Department of Taxation from 1996 to 2000, during Gov. Ben Cayetano's administration.

"The imposition on Safeway of the use tax, and the department's denial of Safeway's tax refund claims for use tax paid, are invalid," Kamikawa said in the appeal.

He cited a state Supreme Court decision in late 2004 in what is called the Baker & Taylor case that held that the half-percent use tax could not be levied on goods imported into Hawai'i by a seller that transferred title to the goods before they entered the state. (Baker & Taylor, a book supplier to the Hawai'i library system, required the library to take title to the books on the Mainland and the company then argued that it was exempt from the use tax.)

Kamikawa also argued that use tax collections violate the state and federal constitutions and "are otherwise illegal."

He could not be reached for comment on this story.

Kamikawa is also the lawyer in another appeal, filed in 2005 on behalf of CompUSA Stores, disputing that company's payment of some $819,000 in use taxes and interest for the years 2000 through 2002. The company reported annual retail sales income of $83 million to $90 million during that period, according to tax-return information filed with the appeal.

In that case, the Tax Department responded with a defense that companies which acquire wholesale goods for resale must pay a half-percent wholesale general excise tax as well as a 4 percent excise tax when the goods are retailed.

"The department disagrees with (the) argument that our use tax discriminates against interstate commerce," said a position paper filed by the department in the appeal.

"By imposing the half-percent use tax on retailers making interstate purchases, the state equalizes the playing field for retailers making the intrastate purchases that include the half-percent general tax," the department said.

The case is now scheduled for trial in April 2008 before Circuit Judge Gary W.B. Chang, who handles the Tax Court calendar.

COSTCO'S CASE

Also pending in Tax Court is an $883,000 appeal filed by Costco Wholesale Corp., which includes a dispute over a use tax bill but centers on the Tax Department's decision to reclassify nearly $18 million of the company's Hawai'i revenue from wholesaling to retailing.

That led to an extra tax bill for the 2000 to 2002 period of some $716,000. The use tax portion of the dispute only amounts to $55,000. With interest, the total amount in dispute is $883,383.

The appeal questions the wholesale/retail reclassification as well as the state Legislature's decision in 2005 to fix problems in the use tax law that were cited by the Supreme Court in the Baker & Taylor case, which covered the tax years 1998 to 2005. The new law was applied retroactively to the earlier tax years.

The new law clarifies that a seller of goods imported into Hawai'i for the purpose of resale must pay the half-percent use tax even if title to the goods passes to the buyer outside of Hawai'i.

In passing the new law, the Legislature said, "Even though the statutory revisions are necessary to address the Hawai'i Supreme Court ruling, they are not substantive changes to the Department of Taxation's (past) interpretation of the use tax. Therefore, retroactive application of this measure ... is appropriate."

The Costco appeal said the "retroactive imposition of use tax" as well as the reclassification of revenues by the department violated Costco's constitutional rights in several ways.

Attorney Miki Okumura, who represents Costco, said she could not comment on the matter without first discussing it with her client.

Deputy attorney general Hugh Jones, who represents the Tax Department, said the use tax cases are an outgrowth of the Baker & Taylor decision and only involve disputes from several years ago.

But tax issues sometimes take a long time to be decided, he said.

"Tax Court is a place where things sometimes move rather slowly," Jones said.

Reach Jim Dooley at jdooley@honoluluadvertiser.com.